Lender Lack of Authority

Posted by on Aug 9, 2011 in Articles, Memos | Comments Off on Lender Lack of Authority

Galvin Realty Law Group, P.S.

 

MEMORANDUM

 

 

Lender Lack of Authority to Enter Premises and What the Seller and Listing Agent Can do to Prevent such Entry

FACTS:  Generally speaking, owners do not go to great lengths to maintain their property once the foreclosure process has begun.  Some owners vacate the house immediately upon default, leaving the property in its then-existing condition.  Other owners stay in the property during all or part of the foreclosure process, keeping the property only habitable.

 

Everyone knows that a well-maintained property will fetch a higher price than one which has been left unattended.  And, the faster the property can be sold, the better.  A lender’s goal then is to have the property in good condition by the time the trustee sale rolls around, and to prevent deterioration, especially of properties that are vacant during the foreclosure process.  Accordingly, more and more lenders are entering the property prior to the trustee sale to make repairs, winterize, change locks, landscape, etc.  But, do lenders actually have the authority to enter the property prior to the trustee sale?  The answer is NO.

 

LAW:  RCW 7.28.230 guarantees a mortgagor his right to possession of the mortgaged property until foreclosure and sale.  Colman v. Hoffman, 115 Wash.App. 853, 64 P.3d 65 (2003), citing Norlin v. Montgomery, 59 Wash.2d 268, 367 P.2d 621 (1961).  The relevant section of RCW 7.28.230 specifically provides, “A mortgage of any interest in real property shall not be deemed a conveyance so as to enable the owner of the mortgage to recover possession of the real property without a foreclosure and sale according to law.”  RCW 7.28.230.

 

A mortgagor does not lose his right to possession by failing to make payments on the mortgage, by moving out of the community or by abandonment.  Colman v. Hoffman, 115 Wash.App. 853, 64 P.3d 65 (2003), citing Howard v. Edgren, 62 Wash.2d 884, 385 P.2d 41 (1963).  For example, in Howard v. Edgren the mortgagee took possession of the mortgaged property without consent of the absentee mortgagor prior to running a foreclosure.  The mortgagee then permitted a contract purchaser to run a business on the property for 19 months.  The Washington Supreme Court ruled that the mortgagee had to pay a reasonable rental value (which included increases in value due to improvements and repairs made by the contract purchaser) to the mortgagor due to that possession even though the mortgagor had abandoned the property.  Howard v. Edgren, 62 Wash.2d 884, 385 P.2d 41 (1963).

 

In fact, the Court has held that title to real property in Washington cannot be lost by abandonment.  Cameron v. Bustard, 119 Wash.266, 205 P. 385 (1922).  Even neglect and non-use for a period of over 20 years will not operate as an abandonment of property rights where there is no adverse possession.  Northern Pacific Ry. Co. v. Tacoma Junk Co., 138 Wash. 1, 244 P. 117 (1926), citing Roby v. New York Central & Hudson River Railroad, 36 N.E. 1053, 142 N.Y. 176.

 

Washington is a lien theory state, meaning that mortgagees in Washington have lien rights only.  As stated by the Washington Supreme Court in Western Loan & Building Co. v. Mifflin, it is “well-settled law that . . . [a] mortgage is nothing more than a lien upon the property to secure payment of the mortgage debt, and is in no sense a conveyance entitling the mortgagee to possession or enjoyment of the property as owner.”  Western Loan & Building Co. v. Mifflin, 162 Wash. 33, 297 P. 743 (1931).  A mortgage, whether covering real property or personal property, is only a lien which the mortgagee may foreclose in the manner provided by law.  Carey v. Interstate Bond & Mortgage Co., 4 Wash.2d 632, 104 P.2d 579 (1940), citing McClellan v. Gaston, 18 Wash. 472, 51 P. 1062 (1898), Roche Fruit & Produce Co. v. Vaught, 143 Wash. 601, 255 P. 953; Parks v. Yakima Valley Prod, Cr. Ass’n, 194 Wash 380, 78 P.2d 162; Lemaire v. Yakima Valley Prod. Cr. Ass’n, 194 689, 79 P.2d 693.

 

Often, deeds of trusts and other security agreements include language to the effect that the lender has the right to take possession of the property upon the mortgagor’s default.  Whether or not such language is present, a mortgagee does not have authority to enter the premises upon the mortgagor’s default.

 

McClellan v. Gaston, decided by the Washington Supreme Court in 1898, is the seminal case supporting this rule.  In McClellan, the mortgage contained language to the effect that, should the mortgagor fail to make payments or at any time feel insecure, the mortgagee could “take possession of the property mortgaged, using all necessary force to do so, and [could] proceed to sell the same in the manner provided by law.”  The Court referred to this term as the “ordinary provision” found in mortgages.  McClellan v. Gaston, 18 Wash. 472, 51 P. 1062 (1898).  The Court held that:

 

“There is no doubt that such clauses are legitimate in mortgages, and confer rights upon the mortgagees; but those rights must be enforced as every other contractual right is enforced.  Because a party to a contract violates his contract, and refuses to do what he agreed to do, is no reason why the other party to the contract should compel the performance of the contract by force.  The adoption of such a rule would lead to a breach of the peace, and it is never the policy of the law to encourage a breach of the peace. . . a mortgagee becomes a trespasser by going upon the premises of the mortgagor and  . . . and taking possession [of property].” Id, at 476.

 

In short, the McClellan Court recognized that the terms of a mortgage must “be enforced by due process of law, the same as any other contract.” McClellan v. Gaston, 18 Wash. 472, 51 P. 1062 (1898).

 

In Carey v. Interstate Bond & Mortgage Co., the borrower, Carey, gave his household furniture as security for his loan.  He subsequently defaulted.  Around the time of the default, Carey’s landlord (due to an unrelated dispute) moved Carey’s furniture onto his porch and front lawn.  The lender, acting under a provision of the mortgage, promptly repossessed the furniture.  The relevant mortgage term provided that the lender could take summary possession of the furniture if the borrower failed to take proper care of the furniture or make his payments.  The Court held that, “the clause in the mortgage providing that the mortgagee may take summary possession of the property gives no right to take possession without the consent of the mortgagor.”  Carey v. Interstate Bond & Mortgage Co., 4 Wash.2d 632, 104 P.2d 579 (1940).  The lender could only obtain possession of the furniture pursuant to foreclosure by one of the statutory methods.

 

The Washington Supreme Court has also held that a mortgagee could not take possession of hops without a foreclosure as provided by law, despite language in the mortgage that, in the case of default, it would be lawful for the mortgagee to take possession of and sell the hops and apply the proceeds to the debt.  Parks v. Yakima Valley Prod, Cr. Ass’n, 194 Wash 380, 78 P.2d 162 (1938).

 

In sum, a lender may not unilaterally enter a borrower’s property prior to the trustee sale without his consent, despite any language in the deed of trust to the contrary.  A mortgage, whether on real property or personal property, operates merely as security and vests no title in the lender.  The lender may only obtain possession of the mortgaged property pursuant to foreclosure by one of the statutory methods, or by obtaining a court order establishing a receivership over the property.

 

RECOMMENDATIONIn order to prevent the lender from entry into the property prior to foreclosure it is recommended as follows:

  1.  Maintain good communication with the lender.  Advise the lender that the property is under the dominion and control of the seller working through his listing broker.  If the seller is maintaining the property, advise the lender that this is happening as well, but note, even if not maintained, the lender does not have a right of entry;
  2. Put a “No Trespassing” sign on the property, with a note that excepts brokers showing the property.  The sign should direct all inquiries to the listing broker, whose contact information should be on the sign;
  3. If the lender nevertheless enters the property, the seller should contact legal counsel and/or file a claim for any damages with the lender caused by the lender’s trespass.

 

 

(DISCLAIMER:  Please keep in mind that every situation is unique, and this memo is of a general nature and does not substitute for consultation with your own independent legal counsel)

The following articles are published for informational purposes and not for the purposes of providing legal advice. Please contact Galvin Realty Law Group at 425.248.2163 for a consultation about your specific needs and circumstances.